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What is estate planning?

When someone passes away, his or her assets and liabilities must pass to another person or institution. A proper estate plan involves strategies to minimize potential estate taxes and settlement costs, as well as coordinate what will happen with your home, investments, businesses, life insurance, employee benefits, retirement assets and other property in the event of death or disability. Fundamental estate planning documents include revocable trusts, wills, financial powers of attorney, medical directives, living wills and beneficiary designation forms for retirement accounts and life insurance policies.

Why is it important to establish an estate plan?

Many individuals fail to address estate planning because they do not think they have “enough assets” or mistakenly believe their assets will automatically pass to their children. If you do not make proper arrangements for the management of your assets and affairs after your passing, your state’s intestacy laws will take over upon your death or incapacity. This can result in the wrong people inheriting your assets.

If you pass away without establishing an estate plan, your estate will undergo probate – a public, court-supervised proceeding. Probate can be expensive and tie up your assets for a prolonged period before your beneficiaries receive them. Even worse, failure to outline your intentions through proper estate planning can cause family chaos as well as unnecessary stress and expense.

What does my estate include?

Simply, your estate is everything you own, anywhere in the world, including:

Your home or any other real estate that you own

Your business interests

Your share of any joint accounts

Your retirement accounts

Any life insurance policies that you own directly

Any property owned by a trust, over which you have significant control

Your personal effects

How do I name a guardian for my children?

If you have minor children, you should designate a person or persons to be appointed as their guardian(s). Of course, if a surviving parent lives with the minor children (and has custody over them) he or she will remain their guardian. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.

What estate planning documents should I have?

A comprehensive estate plan should generally include the following documents which are based upon your particular family and financial situation:

Revocable Trust Like a will, a revocable trust is a legal document that provides for the management and distribution of your assets after your death. A revocable trust has certain advantages over a will. A revocable trust allows for the immediate transfer of assets after death without court interference. It also allows for the management of your affairs in case of incapacity, without the need for a guardian or conservator to be appointed. A revocable trust can be used to hold legal title to and provide a mechanism to manage your property. Typically, you (and your spouse, if desired) will be the trustee(s) and beneficiaries during your lifetime. You also designate successor trustees to carry out your instructions in case of death or incapacity. One of the great benefits of a properly funded revocable trust is the fact that it will avoid or minimize the expense, delay and publicity associated with probate.

Will If you have a revocable trust, you also need a pour-over will. For those with minor children, the nomination of a guardian must be set forth in a will. The other major function of a pour-over will is that it names an executor and allows the executor to transfer any assets that were not titled to your trust during your life.

Financial Power of Attorney A financial power of attorney allows someone to carry on your financial affairs in the event you become disabled. Without a properly drafted power of attorney, it may be necessary for someone to go to court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, emotionally draining and very expensive.

Health Care Power of Attorney (or Advance Medical Directive) You should appoint someone you trust to make medical treatment decisions for you if you lose the ability to decide for yourself. You can do this by using a health care power of attorney (or advance medical directive) to designate the person or persons to make such decisions on your behalf. The health care power of attorney can authorize your agent to make all health care decisions for you or only about certain treatments. Your agent can then ensure that health care professionals follow your wishes. Your health care power of attorney should also include a HIPAA authorization form that allows the release of medical information to your agent. It is important for everyone over the age of eighteen to have a health care power of attorney.

Living Will A living will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding life-sustaining procedures. In conjunction with other estate planning tools, it can bring comfort, peace of mind and security, while avoiding unnecessary expense and delay in the event of future incapacity.

Beneficiary Designations Retirement accounts, such as IRAs and 401ks, are controlled by beneficiary designations filed directly with the plan administrators, rather than by your revocable trust or will. Similarly, if you own insurance on your own life, it will pay to the beneficiary or beneficiaries you instruct on a beneficiary designation form filed with the insurance company. It is important to coordinate your beneficiary designations when you plan your estate and sign other testamentary documents.

Will my estate be subject to estate taxes?

There are two types of estate taxes that you should be concerned about - the federal estate tax and state estate tax. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. In 2018, the federal estate tax exemption is $11,200,000 (less exemption amounts used during life). Estate assets above the exemption amount are taxed at 40%. This exemption is indexed for inflation but will revert to lower amounts in 2025, unless Congress makes changes before then. Under current law, the exemption will revert in 2025 to $5,000,000 indexed for inflation.

Even if you believe that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes. Further, you may have a taxable estate in the future as your assets appreciate in value.

Virginia does not have a state estate tax or inheritance tax. The District of Columbia has an estate tax on assets over the Federal estate tax exemption. Maryland also imposes an estate tax on assets over $4,000,000 and an inheritance tax on assets passing to beneficiaries other than a spouse and descendants. Real estate in other states may also be subject to estate or inheritance tax in the state of location.

You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account current tax law changes as well as shifts in your individual circumstances and your goals for your loved ones.

What is my taxable estate?

Your taxable estate consists of the total value of your assets, including real estate, business interests, your share of joint accounts, retirement accounts and life insurance policies. It is reduced by your liabilities and certain deductions, such as funeral expenses, debts owned by you at the time of death, bequests to charities and your spouse, provided your spouse is a U.S. citizen. Taxes imposed on your estate are paid out of the estate itself, before distribution to your beneficiaries.

What is an Irrevocable Life Insurance Trust and how does it work?

There is a common misconception that life insurance proceeds are not subject to estate tax. While the proceeds are received by your family free of any income taxes, they are included in your taxable estate and therefore your family may lose over 40% of its value to federal estate taxes, and possibly more in state estate tax. If properly drafted and administered, an irrevocable life insurance trust (ILIT) can keep the death benefits of a life insurance policy outside your estate so that they are not subject to estate taxes.

What is probate and why does everyone want to avoid it?

When a loved one passes away, property often goes through a court-managed process called probate or estate administration, in which the assets of the deceased are managed and distributed. If your loved one owned assets through a properly drafted and funded revocable trust, it is likely that no court-managed administration is necessary. The length of time- and the cost - needed to complete probate of an estate depends on the size and complexity of the estate as well as the rules and schedule of the local probate court.

Every probate estate is unique, but most involve the following steps:

Filing of a petition with the proper probate court

Notice to heirs under the will and/or statutory heirs

Notice to certain creditors

Petition to appoint a personal representative (or executor) for the estate

Inventory and appraisal of estate assets by the personal representative